Core Equity Analysis

Core Equity Analysis

Note

Data on this page was last updated on December 05, 2022

Expectations

Expectations are all about trying to identify future expectations of a particular asset.

Warning

A practitioner needs to confirm the expectations with a trend following model and risk management rules. It should not be viewed in a vacuum, and external forces should always be considered.

Long-term (CAPM) Expectations

Running the traditional CAPM model sets the framework for analyzing a multi-factor regression model. It also helps to understand the academic world’s perspective on the asset class. I would not put too much weight on these statistics unless you are a pension fund with very long-term investment horizons. Most of us are not and need to adjust our expectations for both the business cycle and economic factors.

Annualized Performance Metrics (Rf = 2.00%)
Return Std Dev Sharpe Beta
Factor - Min Vol 12.46% 0.1424 0.7193 0.732
Factor - Momentum 13.44% 0.1971 0.5681 0.997
Style - Large Value 11.52% 0.1705 0.5464 0.876
Factor - High Dividend 10.44% 0.1534 0.5387 0.724
Factor - Quality 11.58% 0.1793 0.5232 0.965
Factor - Size 11.44% 0.1804 0.5123 0.916
Factor - Value 9.81% 0.1926 0.3965 0.972
Style - Large Growth 9.8% 0.2008 0.3800 0.985
Style - Large Blend 9.31% 0.1927 0.3712 0.970
Factor - Dividend 9.36% 0.2008 0.3586 0.898
Bechmark (Wilshire 5k) 8.36% 0.1809 0.3439 1.000
Style - Mid Core 9.41% 0.2195 0.3305 1.046
Style - Small Core 9.89% 0.2344 0.3293 1.070
Style - Mid Growth 9.25% 0.2329 0.3046 1.078
Style - Mid Value 8.79% 0.2242 0.2963 1.035
Style - Small Value 9.01% 0.2354 0.2912 1.114
Style - Small Growth 8.9% 0.2356 0.2866 1.125
Index - S&P 500 Index 6.8% 0.1956 0.2396 0.968
Emerging Markets 8.55% 0.2838 0.2255 1.210
Index - NASDAQ 8.32% 0.2781 0.2221 1.185
Europe, Australia, Asia, Far East 5.79% 0.1713 0.2162 0.831
Sector - Real Estate 7.71% 0.3006 0.1856 1.178
Total International Stock ETF 4.8% 0.1693 0.1612 0.825
Index - Russell 2k 5.81% 0.2552 0.1459 1.168
MSCI Pacific 3.84% 0.1671 0.1071 0.737
Developed Markets 2.41% 0.2275 0.0171 0.961

Business Cycle Expectations

The first step to estimating proper expectations is to understand the performance metrics filtered by our six business cycle stages. Core equities are sensitive to inflation expectations, growth, and credit risk; which often correlate to the business cycle.

Click to Show the performance tables by stage of the business cycle.
Annualized Performance in a Recession (Rf = 2.00%)
Return Std Dev Sharpe
Factor - Momentum -16.1% 0.5732 -0.3098
Emerging Markets -17.17% 0.5481 -0.3432
Factor - Quality -23.35% 0.5535 -0.4492
Style - Small Core -13.87% 0.3285 -0.4741
Style - Mid Core -13.94% 0.3237 -0.4833
Index - Russell 2k -16.7% 0.3525 -0.5205
Index - NASDAQ -20.81% 0.4186 -0.5347
Style - Large Growth -19.2% 0.3566 -0.5833
Index - S&P 500 Index -16.77% 0.3018 -0.6102
Bechmark (Wilshire 5k) -17.72% 0.3033 -0.6379
Factor - Min Vol -33.6% 0.5206 -0.6706
Factor - Size -40.4% 0.6155 -0.6755
Style - Small Growth -26.11% 0.4025 -0.6850
Style - Mid Growth -26.43% 0.4048 -0.6888
Factor - High Dividend -38.1% 0.5628 -0.6988
Sector - Real Estate -41.88% 0.6128 -0.7022
Style - Large Blend -24.72% 0.3670 -0.7142
Factor - Dividend -27.8% 0.3897 -0.7499
MSCI Pacific -34.47% 0.4475 -0.7993
Style - Large Value -46.31% 0.5757 -0.8229
Factor - Value -52.06% 0.6318 -0.8391
Style - Small Value -35.64% 0.4334 -0.8518
Style - Mid Value -35.05% 0.4064 -0.8940
Total International Stock ETF -43.33% 0.4904 -0.9065
Developed Markets -36.41% 0.4135 -0.9111
Europe, Australia, Asia, Far East -44.89% 0.5000 -0.9196
Annualized Performance in a Recovery (Rf = 2.00%)
Return Std Dev Sharpe
Factor - Size 52.81% 0.1778 2.8013
Total International Stock ETF 42.4% 0.1611 2.4570
Factor - Quality 42.7% 0.1658 2.4051
Europe, Australia, Asia, Far East 40.37% 0.1661 2.2636
Style - Large Value 37.87% 0.1557 2.2579
Factor - Value 48% 0.2054 2.1949
MSCI Pacific 32.37% 0.1579 1.8843
Style - Mid Growth 42.45% 0.2231 1.7769
Factor - Min Vol 25.81% 0.1332 1.7508
Style - Mid Core 40.54% 0.2201 1.7153
Index - NASDAQ 37.03% 0.2108 1.6281
Style - Large Growth 33.58% 0.1922 1.6101
Style - Small Growth 41.76% 0.2433 1.6018
Emerging Markets 44.06% 0.2575 1.6009
Style - Mid Value 41.38% 0.2458 1.5703
Style - Small Core 42.19% 0.2517 1.5646
Index - S&P 500 Index 29.96% 0.1812 1.5115
Style - Large Blend 31.17% 0.1900 1.5043
Style - Small Value 43.19% 0.2703 1.4936
Index - Russell 2k 39.71% 0.2506 1.4743
Bechmark (Wilshire 5k) 30.41% 0.1891 1.4718
Factor - Momentum 34.93% 0.2264 1.4252
Factor - High Dividend 24.66% 0.1653 1.3429
Factor - Dividend 31.24% 0.2226 1.2867
Developed Markets 31.48% 0.2333 1.2380
Sector - Real Estate 42.94% 0.3756 1.0682
Annualized Performance in a Early Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Factor - Momentum 22.4% 0.1356 1.4735
Factor - Min Vol 16.69% 0.0992 1.4505
Factor - Quality 17.32% 0.1072 1.3994
Factor - Value 19.25% 0.1347 1.2547
Europe, Australia, Asia, Far East 17.89% 0.1292 1.2041
Factor - Size 16.85% 0.1213 1.1987
Factor - High Dividend 13.2% 0.1206 0.9093
Index - NASDAQ 16.93% 0.1779 0.8222
Total International Stock ETF 11.96% 0.1302 0.7491
Factor - Dividend 13.61% 0.1540 0.7381
Style - Large Blend 13.89% 0.1584 0.7346
Index - S&P 500 Index 13.79% 0.1580 0.7306
Style - Small Core 17.82% 0.2127 0.7282
Style - Small Value 16.51% 0.2034 0.6984
Style - Large Growth 13.55% 0.1646 0.6870
Sector - Real Estate 15.13% 0.2016 0.6376
Style - Mid Value 14% 0.1882 0.6242
Style - Large Value 12.15% 0.1658 0.5995
Style - Mid Core 13.78% 0.1929 0.5978
Bechmark (Wilshire 5k) 11.78% 0.1635 0.5854
Style - Mid Growth 12.27% 0.2068 0.4860
Style - Small Growth 12.2% 0.2161 0.4622
Index - Russell 2k 12.5% 0.2303 0.4463
Developed Markets 4.83% 0.2162 0.1277
Emerging Markets 0.24% 0.2355 -0.0738
MSCI Pacific -1.57% 0.1268 -0.2768
Annualized Performance in a Mid Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Factor - Min Vol 11.53% 0.1046 0.8915
Factor - Dividend 11.34% 0.1150 0.7950
Factor - Momentum 12.87% 0.1452 0.7328
Factor - Value 11.76% 0.1357 0.7042
Factor - High Dividend 9.76% 0.1100 0.6900
Index - NASDAQ 12.59% 0.1568 0.6608
Factor - Size 10.04% 0.1190 0.6608
Factor - Quality 10.49% 0.1274 0.6522
Style - Mid Value 10.47% 0.1325 0.6251
Style - Large Value 9.66% 0.1246 0.6013
Index - S&P 500 Index 9.73% 0.1269 0.5954
Style - Large Blend 9.52% 0.1296 0.5679
Style - Large Growth 9.04% 0.1370 0.5027
Style - Mid Core 8.27% 0.1401 0.4376
Bechmark (Wilshire 5k) 7.05% 0.1286 0.3840
Style - Small Value 7.67% 0.1447 0.3832
Style - Small Core 8.01% 0.1583 0.3712
Style - Mid Growth 6.32% 0.1454 0.2903
MSCI Pacific 5.66% 0.1435 0.2491
Sector - Real Estate 5.51% 0.1458 0.2352
Europe, Australia, Asia, Far East 5.09% 0.1422 0.2119
Developed Markets 4.87% 0.1419 0.1974
Total International Stock ETF 4.79% 0.1417 0.1920
Emerging Markets 4.42% 0.1872 0.1257
Style - Small Growth 3.95% 0.1574 0.1202
Index - Russell 2k 3.68% 0.1783 0.0916
Annualized Performance in a Late Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Factor - High Dividend 18.51% 0.1229 1.3152
Sector - Real Estate 22.46% 0.1568 1.2784
Factor - Min Vol 15.8% 0.1241 1.0886
Factor - Dividend 9.46% 0.1156 0.6310
Index - S&P 500 Index 8.93% 0.1428 0.4749
Style - Small Core 10.04% 0.1714 0.4589
Factor - Size 9.02% 0.1532 0.4483
Style - Mid Core 9.02% 0.1599 0.4295
Style - Small Growth 9.9% 0.1945 0.3973
Style - Mid Growth 10.35% 0.2102 0.3886
Style - Large Blend 7.44% 0.1404 0.3787
Style - Large Value 7.16% 0.1388 0.3634
Factor - Quality 8.06% 0.1711 0.3462
Style - Small Value 6.68% 0.1513 0.3024
Factor - Momentum 7.83% 0.2157 0.2644
Index - Russell 2k 6.12% 0.2088 0.1928
Style - Large Growth 5.3% 0.1719 0.1872
Bechmark (Wilshire 5k) 4.7% 0.1708 0.1541
Emerging Markets 5.04% 0.2375 0.1249
Index - NASDAQ 4.7% 0.3167 0.0830
Style - Mid Value 2.91% 0.1449 0.0603
Factor - Value -3.49% 0.1645 -0.3281
MSCI Pacific -5.8% 0.1441 -0.5320
Developed Markets -7.48% 0.1520 -0.6122
Total International Stock ETF -8.05% 0.1577 -0.6258
Europe, Australia, Asia, Far East -8.23% 0.1554 -0.6468
Annualized Performance in a Imminent Recession (Rf = 2.00%)
Return Std Dev Sharpe
Factor - Dividend 12.55% 0.1408 0.7334
Style - Mid Value 11.95% 0.1613 0.6037
Style - Large Blend 10.05% 0.1708 0.4611
Factor - Min Vol 8.61% 0.1482 0.4360
Style - Small Value 9.25% 0.1860 0.3814
Style - Mid Core 9.34% 0.1933 0.3714
Style - Large Value 7.65% 0.1668 0.3312
Emerging Markets 8.98% 0.2070 0.3298
Style - Mid Growth 7.75% 0.2123 0.2650
Style - Large Growth 7.52% 0.2100 0.2571
Factor - Momentum 6.82% 0.1842 0.2559
Style - Small Growth 7.74% 0.2235 0.2511
Style - Small Core 5.83% 0.2034 0.1839
Sector - Real Estate 5.13% 0.1883 0.1623
Index - S&P 500 Index 4.25% 0.1733 0.1265
Factor - High Dividend 3.44% 0.1474 0.0950
Factor - Quality 3.45% 0.2044 0.0687
Factor - Value 3.17% 0.1963 0.0577
Factor - Size 2.43% 0.1982 0.0203
Bechmark (Wilshire 5k) 1.27% 0.1799 -0.0404
Europe, Australia, Asia, Far East 0.68% 0.1749 -0.0751
Index - Russell 2k -0.55% 0.2504 -0.1005
Developed Markets -0.33% 0.1749 -0.1316
MSCI Pacific -0.92% 0.1565 -0.1842
Total International Stock ETF -1.87% 0.1703 -0.2238
Index - NASDAQ -6.81% 0.2946 -0.2937
Note

The current stage of the business cycle is stage 6 which is a imminent recession.

**

Business Cycle Stage Best performers

Return Std Dev Sharpe
Factor - Dividend 12.55% 0.1408 0.7334
Style - Mid Value 11.95% 0.1613 0.6037
Style - Large Blend 10.05% 0.1708 0.4611
Style - Mid Core 9.34% 0.1933 0.3714
Style - Small Value 9.25% 0.1860 0.3814

Annualized Metrics (Rf = 2.00%)

Important

Avoid the following equity classes:

Return Std Dev Sharpe
Developed Markets -0.33% 0.1749 -0.1316
Index - Russell 2k -0.55% 0.2504 -0.1005
MSCI Pacific -0.92% 0.1565 -0.1842
Total International Stock ETF -1.87% 0.1703 -0.2238
Index - NASDAQ -6.81% 0.2946 -0.2937
Annualized Metrics (Rf = 2.00%)

Factor Expectations

By this point, you should know that economic factors play a vital role in estimating the future expectations of an asset. Each asset needs to be run through our machine learning regression model to assess what factors are essential and the future expectation for the help.

Relative Stregnth Analysis

Relative strength is a strategy used in momentum investing and identifying value stocks. It focuses on investing in stocks or other investments that have performed well close to the market or relevant benchmark. We use relative strength to confirm our assumptions about our expectations. We should see out performance compared to the benchmark and peers if our assumptions are correct.

Rotation Analysis

A rotation chart can help identify the momentum of a trend. The top-left quadrant is a developing trend, just starting to unfold. The top-right quadrant is a developed trend. A weakening trend is in the bottom-right. And the last quadrant, the bottom-left, is a downtrend.

Relative Rotation, to the market

Zero iis the performance of Wilshire 5k, Above zero is performance in excess of the market, anything below is underperformance.

Rotation Chart

Rotation chart of Rate of Change, y and x axis is rotion of rate of change.

Trend Anlaysis

Trend following is a trading style that attempts to capture gains by analyzing an asset’s momentum in a particular direction. When the price moves in one overall direction, such as up or down, that is called a trend.

Trend traders enter into a long position when security is trending upward. An uptrend is characterized by higher swing lows and higher swing highs. Likewise, trend traders may opt to enter a short position when an asset is trending lower. Or, in our case, managing long-only, chose to avoid securities that are trending down. A downtrend is characterized by lower swing lows and lower swing highs.

Having predefined rules on what is and isn’t a trend also provides us with a method for controlling risk. We know at what price we would not consider being invested in a position. Following our trend system, we always know when we should cut our losses.

Trend Table & Rolling Performance

Rolling Performance
Trend Efficiency Ratio One Month Three Month Six Month One Year Drawdown
Factor - Dividend 0.05 7.05 5.52 5.51 5.14 -1.24
Factor - High Dividend 0.1 4.81 6.34 0.11 10.67 -2.54
Style - Large Value 0.06 5.67 6.49 3.1 0.43 -5.42
Factor - Min Vol 0.21 6.17 4.95 4.95 -2.27 -7.17
Style - Mid Value -0.04 5.77 4.3 1.06 -2.52 -7.84
Style - Small Value -0.07 5.06 5.08 4.21 -3.47 -7.85
Style - Mid Core -0.06 5.58 5 6.08 -6.64 -10.37
Factor - Size -0.02 6.15 3.4 2.34 -9.06 -12.7
Style - Small Core -0.1 3.89 4.08 4.2 -9.64 -12.97
Index - S&P 500 Index 0.02 5.81 2.13 2.37 -11.27 -15.22
Factor - Value -0.08 4.54 4.22 -2 -7.3 -15.73
Developed Markets 0.1 12.44 7.47 -2.08 -13.15 -15.76
Europe, Australia, Asia, Far East 0.15 13.24 8.45 -1.73 -13.6 -16.08
Style - Large Blend 0 5.64 1.86 2.29 -12.95 -16.59
MSCI Pacific 0.13 11.91 4.29 -2.79 -14.56 -16.59
Total International Stock ETF 0.14 12.5 5.8 -2.26 -14.85 -17.02
Factor - Quality 0.04 7.69 3.81 2.61 -13.92 -17.48
Factor - Momentum 0.07 3.58 7.58 9.17 -14.13 -17.64
Emerging Markets 0.14 13.56 0.64 -3.4 -19.8 -22.3
Index - Russell 2k -0.1 1.91 1.05 9.23 -19.89 -23.41
Style - Small Growth -0.1 3.19 0.15 4.75 -21.16 -24.47
Sector - Real Estate -0.23 5.64 -6.23 -10.18 -20.09 -24.92
Style - Mid Growth -0.08 6.03 1.32 5.67 -21.01 -25.05
Index - NASDAQ -0.03 6.34 -2.81 0.44 -24.25 -27.69
Style - Large Growth -0.05 5.73 -3.29 1.16 -25.06 -28.46
Drawdown is calculated from the 52 week high, less current price. The draw down will not reflect a loss that is longer than one year. Trend is based off our own propritary trend follwing model.

Summary

To build a tactical portfolio, we need to understand and set expectations. We start with our macro and factor models. We then need to confirm our assumptions with a relative strength analysis. Finally, we want the ability to control the downside risk when things do not go as expected. We use a trend analysis that sets the point that we will exit no matter what.

E(r) Business Clycle E(r) Factor Relative Rotation Absolute Rotation Trend Efficiency Drawdown
Factor - Dividend -1.24
Factor - High Dividend -2.54
Style - Large Value -5.42
Factor - Min Vol -7.17
Style - Mid Value -7.84
Style - Small Value -7.85
Style - Mid Core -10.37
Factor - Size -12.7
Style - Small Core -12.97
Index - S&P 500 Index -15.22
Factor - Value -15.73
Developed Markets -15.76
Europe, Australia, Asia, Far East -16.08
Style - Large Blend -16.59
MSCI Pacific -16.59
Total International Stock ETF -17.02
Factor - Quality -17.48
Factor - Momentum -17.64
Emerging Markets -22.3
Index - Russell 2k -23.41
Style - Small Growth -24.47
Sector - Real Estate -24.92
Style - Mid Growth -25.05
Index - NASDAQ -27.69
Style - Large Growth -28.46